Active retail investors have played an important role in this year's stock market rally, pressuring institutions to take a more positive outlook, according to Liz Ann Sonders, Charles Schwab chief investment strategist.
"You've had this incredibly powerful cohort in the name of retail traders born out of the pandemic that still had that buy-the-dip mentality that really powered the market higher and actually brought institutions along with it, given that we saw areas that were later better performers, like heavily shorted stock," she said during the company's midyear outlook webcast Tuesday.
These retail investors forced "a more optimistic take on the market by institutions. That's something I think we have to be mindful of in this unique market structure right now," said Sonders.
She repeated the point later on CNBC's "Closing Bell," saying retail traders' fingerprints "are all over" the market rally and that their buy-the-dip mentality “forced some rethinking on the part of institutions.” Institutions are still not positioned aggressively risk on, suggesting the "pain trade" may be higher from an institutional positioning standpoint, she said.
The S&P 500, which neared a record high Wednesday, has rallied since an April selloff prompted by worries over Trump administration tariff policies.
The market was somewhat complacent leading into the April 2 downturn, with an assumption of roughly 10% universal tariffs, "and then the reciprocal tariffs big board was thrown up there, and that really threw the market for a loop in part because of that embedded complacency," said Sonders.
Imploding markets sent a message that the administration needed to back off its dire tariff proposals a bit, and the ensuing delay in implementation — relatively positive news — sent stocks higher, she noted.
Now, she added, "I think the setup is one maybe of a little bit of complacency, not to the same degree as we were heading into April 2nd, but something to be mindful of, meaning you might just have a little bit more downside if you get some sort of negative shock that lasts, like in the case of Israel, Iran, more than say 48 hours."
Sonders repeated her concept that "better or worse matters more than good or bad" in the stock market, relative to expectations. Right now, the country has imposed a 15% average effective tariff rate, which is better than the worst-case scenario in April, she said. The next big date is July 8, when the pause on the administration's initial heavy tariffs expires, Sonders noted on the Schwab call.
In their midyear outlook posted earlier this month, Schwab strategists said investors should continue to embrace diversification across and within asset classes, especially given the dominance of international markets this year.
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